TaxTMI 
TaxTMI 
2005 (12) TMI 225
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....is inconsistent with the practice followed by the appellant of treating expenditure on replacement of dies and moulds as revenue expenditure, which has been consistently accepted by the Department for past two decades. VI. That the order of the CIT may be cancelled." 2. Since the grounds of appeal are interconnected they are disposed off together for the sake of convenience. 3. The brief facts of the case are that the assessee filed return of income on 25th Oct., 2001 declaring income of Rs. 9,57,53,430 along with statutory audit report, statement of accounts and tax audit report. The assessment was completed under s. 143(3) and order passed on 6th Feb., 2003 after hearing Shri M.P. Singh, Vice President (Finance) and Shri L.D. Seth, divisional manager of the assessee-company, who attended the proceedings on various dates and filed details/evidences and written submissions at the returned income of the assessee. 4. Thereafter, the learned CIT-III, Delhi, issued notice on 3rd Nov., 2004 to the assessee to show cause why appropriate order under s. 263 be not passed with a view to correcting the lapse committed by the AO. In response to this notice, the Authorised Represen....
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....1. The cost of each die was derived at Rs. 2,16,73,124. The lower die was used for the purpose of manufacturing transmission case lower and the upper die for the purpose of manufacturing transmission cases upper for supply to MUL. 7. He noted that it was stated by the learned Authorised Representative that the aforesaid new lower die purchased on 14th Feb., 2001 replaced the old die on 28th Feb., 2001. Thus, he observed that the new die was put to use for only one month during the previous year under consideration. Yet the entire cost of the die i.e., Rs. 2,16,73,124 was debited in the P&L a/c of the current year and was accepted by the AO. He observed that if the die were to be treated as a capital asset, the assessee would have been entitled to only 50 per cent of the eligible depreciation as the die was used for less than 180 days. He also observed that even if the item was not treated as a capital asset, then only the proportionate cost of the die, determined with reference to the number of parts manufactured from it during the previous year under consideration vis-a-vis total number of parts which it is capable of producing (according to the learned Authorised Representativ....
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....o-year. It distorts the position of true profits by shifting profits of one year to another and opens the possibility of manipulating the profits by manipulating the installation of the expensive dies. 12. He also noted that from the details filed by the assessee for achieving similar levels of production of transmission case lower (die) during the years, 2000-01 to 2002-03 the cost of tools and dies debited varied very significantly as follows: ---------------------------------------- Asst. yr. No. of parts Cost of tools produced and dies ---------------------------------------- 2000-01 1,69,000 5,63,58,842 2001-02 1,77,000 2,16,73,123 2002-03 2,07,000 1,78,70,013 ---------------------------------------- 13. The learned CIT, therefore, concluded that there was no satisfactory explanation of such variation in the method of accounting followed by the assessee to debit the entire co....
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....account is not the only expenditure incurred in the production of the dies in-house. He submitted that the other expenditure which related to the salary and wages of the technicians and staff, depreciation on the machinery, etc. are debited in the respective account heads in the accounts of the company. He further stated that from p. 39 of the paper book wherein show-cause notice issued under s. 263 of the IT Act, 1961 for the asst. yr. 2001-02 dt. 2nd Nov., 2004 is placed it will be seen that the CIT has stated that the expenditure on tools and dies is in the nature of capital expenditure and thus is not allowable as deduction under s. 37(1) of the IT Act, 1961. In the notice it is further stated that since the AO allowed the expenditure as a revenue expenditure it appears to him that the assessment framed is erroneous and prejudicial to the interest of the Revenue. He submitted that from p. 40 to p. 56 of the paper book the detailed replies to the CIT are placed which were submitted during the course of the hearing. It was also submitted by the learned counsel for the assessee that at p. 62 the details of the turnover net of excise, tools and dies expenditure claimed and tools an....
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....g the Department to take a different view from that taken in earlier proceedings the question of the exemption of the assessee should (not) have been reopened. Strictly speaking res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. He also relied on the decision of the Hon'ble Delhi High court in CIT vs. A.R.J. Security Printers (2003) 183 CTR (Del) 323 : (2003) 264 ITR 276 (Del) wherein the decision of the Hon'ble Supreme Court in Radhasoami Satsang was followed. He also placed reliance on the decision of the Hon'ble Delhi High Court in CIT vs. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del) wherein also the decision of the Hon'ble Supreme Court in Radhasoami Satsang was followed. 18. He also placed reliance on the decision of the Chandigarh Bench of the Tribunal in the ca....
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....) 241 ITR 556 (Del) wherein it was held by the Hon'ble High Court that the moulds in question did not enhance the capacity of the existing machines and were mere replacements for the moulds damaged during the process of manufacture of glass. Therefore, it was a revenue expenditure incurred by the assessee. In doing so, the decision of the Karnataka High Court in CIT vs. Mysore Spun Concrete Pipe (P) Ltd. was followed. 22. The learned counsel for the assessee further argued and submitted that the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) held that when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the ITO is unsustainable in law. He further submitted that the learned CIT has violated the principle, of natural justice as it made out an entirely new case without giving an opportunity to the assessee. He started the proceedings by saying that the expenditure incurred ....
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.... of the assessee is concerned he has to give notice to the assessee. By relying on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Emery Stone Manufacturing Co. (1995) 126 CTR (Raj) 345 : (1995) 213 ITR 843 (Raj) he submitted that it was held by the Hon'ble Rajasthan High Court that even in a case where the facts have been disclosed by the assessee to the assessing authority, if the correct provisions of law have not been examined by the assessing authority, the power under s. 263 of the IT Act, 1961, can be invoked. 24. The learned Departmental Representative further placed reliance on the decision of the Hon'ble Delhi High Court in Gee Vee Enterprises vs. Addl. CIT 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del) wherein it was held that it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an enquiry prudent (and) that the word "erroneous" in s. 263 includes the failure to make such an enquiry. He submitted that to the same effect was the decision of the Hon'ble Delhi High Court in CWT vs. Anokha Singh (2000) 162 CTR (Del) 222 : (2000) 246 ITR 26 (Del). Hence, he submitted that since the AO has n....
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....aside the order of the AO and remand the matter back to his file for making reassessment after making further enquiries as directed by the CIT. 28. The learned Departmental Representative also placed reliance on the decision of the Hon'ble Supreme Court in CIT vs. McMillan & Co. (1958) 33 ITR 182 (SC) wherein it was held that the CIT can pass an order under s. 263 of the Act if he finds the method of accounting adopted by the assessee is such that the true profits of the assessee cannot be computed on the basis of the accounting procedure adopted by the assessee. He submitted that the method of accounting followed by the assessee of writing off of the entire cost of dies in the year of its installation without considering the useful life of the same was not a correct accounting procedure adopted by the assessee. Hence, the order passed by the CIT was justified. 29. The learned Departmental Representative further submitted that in the asst. yr. 1999-2000 there was no income shown by the assessee and, therefore, no expenditure was claimed under this head by the assessee. He further submitted that in the asst. yr. 2000-01 the claim of the assessee was accepted by the AO while pr....
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.... In short the issue before us is whether the CIT was justified in restoring the issue of allowability of dies as a revenue expenditure to the AO by passing an order under s. 263 of the Act. We observe that the CIT after verifying the assessment records was of the view that the expenditure claimed on dies by the assessee in its P&L a/c was a capital expenditure and since the AO had allowed deduction for the same as a revenue expenditure, the order passed by the AO was erroneous and prejudicial to the interest of the Revenue. He, therefore, initiated proceedings under s. 263 of the Act. 34. We find from the submissions of the learned Authorised Representative of the assessee that the expenditure on dies was claimed as a revenue expenditure by the assessee since financial year 1988-89 till financial year 1999-2000 when it was a suit of M/s Highway Cycle Industries Ltd., Ludhiana. From financial year 2000-01, it became an independent company in the name of M/s Sunbeam Auto Ltd. and has followed the same accounting practice. 35. We also note that the CIT has given a finding that the life of the die was approximately a year or so. We fail to appreciate as to how the CIT was of the ....